Crude Oil Prices, but Hedge Funds are Reducing Their Exposure

David Becker
Crude Oil
Crude Oil

The backwardation in the crude oil markets shows that the market remains bullish as prices are currently higher today than they are in the future making it nearly impossible to store and hold.  When prices are higher today, there is strong demand for crude oil. This is evident by the robust increase in refining operations which have been reported to be on the increase according to the U.S. Department of Energy.

Technical

Crude oil prices rebounded more than 2% on Monday as risk aversion abated.  Prices generated and inside day where the high was lower than the prior days high and the low was higher than the price days low. This reflects a market that is indecisive. Support on crude oil prices is seen near an upward sloping trend line that comes in near 62. Resistance is seen near the 10-day moving average at 63.91. The fast stochastic generated a crossover buy signal coming out of oversold territory which reflects accelerating positive momentum.

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Hedge Funds are Long

Hedge fund substantially reduced long position in futures and options according to the most recent commitment of trader’s report released for the date ending April 3, 2018. According to the CFTC, managed money reduced long position in futures and options by 36K contracts, more than 7% of the prior open interest, while increasing short position in futures and options by 7K contract.  The current open interest that is long futures and options outnumber contracts that are short held by managed money by nearly 12.5-times.

Nuclear Treaty would Benefit Riskier Assets

U.S. and North Korean officials have held secret contacts recently in which Pyongyang directly confirmed its willingness to hold the unprecedented summit. The communications, still at a preliminary stage, have involved State Department officials talking to North Korea apparently through its United Nations mission, and intelligence officers from both sides using a separate backchannel.

It was a tumultuous first week of the quarter that has left the markets caught between more truculent tweets on trade from President Trump, and slightly more diplomatic messages from his advisors. Predictably China countered with $50 billion in tariffs of their own against a variety of U.S. imports, while the White House threatened to lump on another $100 billion tariffs to the $50 billion already on the table. Advisors Navarro and Kudlow, along with Treasury’s Mnuchin, said this was not a full blown “trade war,” but were vague as to whether negotiations had even begun, while China’s commerce ministry denied any talks had been launched.

Fed Chairman Powell remained bullish on the economy

Fed Chairman Powell remained bullish on the economy in his speech on the outlook, suggesting “gradualism” remained intact, while in Q&A he felt it was premature to draw implications from the tariff threats either for inflation or growth. A possible breakthrough on NAFTA could be expedited as early as this week as a blueprint for blunt force tactics ahead of key political hurdles in those regions, though Trump urged his negotiators to get good deal over a quick one. Facebook CEO Zuckerberg also testifies before Congress on Wednesday, which is another potential upside surprise risk, if the likely chilly proceedings go better than expected.

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